Before we start, we would like to point out that at the left sidebar of this page you can find the implied future returns of the world’s 18 largest stock markets, sorted from the highest return to the lowest for developed markets and emerging markets.

Those two pages have served the U.S. market very well. However, a lot of users asked us about the international market. Indeed, sometimes investors are better served to invest internationally. The purpose of this page is to provide an overview of the stock market valuations of the 18 largest economies in the world. The indicator we use is still the percentages of the total market caps of these countries over their own GDPs.

As pointed out by Warren Buffett, the percentage of total market cap (TMC) relative to the U.S. GNP is “probably the best single measure of where valuations stand at any given moment.” Unlike the U.S. market, the histories of the data for other countries are not long enough to provide a more accurate projection of future returns. But still we believe that this page can give a good idea on where the market stands currently with overall valuations.

Before we get into the details of how we arrived at our results, these are the implied returns of the stock market worldwide, including both developed markets and emerging markets, as displayed in the left sidebar. This page is updated daily.

Future business growth: We assume that average future growth will be the same as past growth. This may overestimate growth for fast-growing economies.

Dividends: The average future dividends per year in the next five years will be equal to the average of the last five years. This may underestimate dividend yield as in general, dividends will grow as economies grow.

Change in market valuation: A big assumption here in the market valuation is that the ratio of market cap to GDP will revert to its previous mean during a full market cycle, which will last 7-8 years.

Future business growth: Similar to what we did for the U.S. market, we estimate the future business growth using the past GDP growth of these countries. The GDP data we use is either from the reported data of the statistics departments of these countries or data published by the World Bank. For some of these countries, only annual data is available.

Dividends: We use the dividends of the corresponding iShares country ETF to estimate the current dividend yield of the country’s stock market. While the dividends of these ETFs were never consistent, we use the average of the dividends of the ETFs over the last five years to estimate future dividends.

Change in market valuation: As detailed in the U.S. market valuation, we use the Wilshire Total Market index to estimate the total market cap of the U.S. market. However, no similar indexes exist for other countries. Instead we use the most dominant market indexes in those countries as proxies of the total market indexes. We assume that these indices change proportionally with the total market. These indexes are then converted to the total market cap based on the ratios of total market cap over GDP data published by the World Bank.

The details of the indexes we used for different countries are in the page for each country. Click on the country’s name on the left sidebar to check out.

Error Sources:

The sources of errors are from the assumptions:

Future average GDP growth might be different from past growth. This can be especially true for countries of emerging markets that have high growth rates. The slowdown can affect the results dramatically.

We are using GDP data instead of GNP data for the calculations.

In most cases the index we use covers at least 70% of the total market in the country. But the total market may deviate slightly from the index.

The mean of the historical valuation may not be the mean for the future, especially when we do not have enough historical data.

How to interpret the data:

If we have less than 20 years of data, the history of the data is certainly too short for an accurate prediction of future returns. The current ratio of market cap over GDP in this page gives you an idea on where the market stands from historical perspective.

We may not come to an accurate projection for future returns, especially for emerging markets. But we believe that this page can give us a good idea on where we stand for different countries in terms of historical market valuations.

Detailed Data and Discussions:

This page presents the market valuation of the 18 largest economies in the world. The market valuation is measured by the ratio of total market cap to GDP. These are the GDPs in U.S. dollars for these countries. Original GDP data was in each country’s national currency. They are converted into the U.S. dollar using the exchange rate of May 2014.

As listed, the U.S. has the largest economy, followed by China, Japan, Germany, France, etc. The market cap of the U.S. is also the largest, as of May 2014. However, the market caps of other countries do not display as monotone a decline as the GDP, as shown in the chart below:

Putting your mouse over the columns of the chart you will find the exact current total market cap over GDP ratios for each country. We can see that the ratio varies dramatically across different countries. Historically these ratios swing wildly. For instance, the ratio of total market cap over GDP climbed to 355% in 1989, when Japan’s economy was booming and nothing could stop the country of the rising sun. But the ratio sank to as low as 60% in 2003 and 2009, when the country of the rising sun seemed to have plunged into permanent darkness. The chart below is the current ratio of total market cap over GDP and its historical range. It is also listed in the table at the left side of the chart. The data is updated daily.

As we discussed above, the total returns of the future market come from three factors: GDP growth, dividend yield and change of overall market valuation. Assuming the market valuation will revert to the historical mean, the contributions from each component are listed in the table. The countries are separated into developed market and emerging market. Only the countries that have at least 10 years of data are displayed.

Contributions from GDP Growth

These are the past GDP growth rate of these countries. Apparently developing countries had much faster growth than developed countries. This may over-estimate the future returns of the emerging market.

The average of the dividend payment of the country ETFs over the last five years was used to estimate the dividend yield. Yield is calculated by dividing the dividend by the current prices of the corresponding ETFs.

We can clearly see that for the emerging market, the contribution from economic growth is much higher than in the developed market. For instance, the average growth for China’s economy is more than 16% a year for the eight-year period before 2012; India’s economy averaged about 15% of growth a year. These high growth rates contributed to the future returns substantially.

But on the other hand, the economic growth of these countries cannot continue at these rates forever. They may slow down drastically in the future. Considering these factors and the shorter history of data, we believe that the implied returns for the emerging market carry much higher uncertainty.

On the other hand, the projection for developed countries should be much more reliable, especially when we have a longer history of data available. The U.S. market valuation page has done a decent job in predicting the future returns of the U.S. market.

Click on the country on the left sidebar to check out the details for each country.

I am also concerned about the ratio of public to private companies in these countries. Imagine that 100% of the US is public (public companies do dwarf private companies) and that 30% of companies are public in Italy. Italy will *always* appear dramatically undervalued compared to the US, but for an accurate calculation the private sector contribution to GDP needs to be subtracted from Italy. I think that all the country information is inaccurate unless there is data on % of public and private companies. Do you know if this data exists?

Russia is Gonna Tank now, how come Russia is such high even when OIL tanked, we need to change it. India is growing at 5-6% GDP from past 2-3 years , not anywhere around 14-15%. how is this Data Processed and why the numbers are so high 6% V/s 15%.

Great information! I used this page since many months ago and it is very useful.
Can you revise the spanish market? There aren't no updates since may... And the dividends yield? The number is "0" for all Markets.
Many thanks!

Using 10.55% economic growth for Brazil, which appears to be a key input for the expected returns calc here, seems way too high. Growth has been less than 3% for the last three years. See http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
Would like to see more realistic inputs being used, otherwise the conclusion does not appear to be useful at all.

I think, in the case of Germany there was a very special situation that might have greatly affected this ratio during the first 5 years (at least), as the reunification of Germany probably contributed more to the GDP than to the Market Cap of that Index, since lower wage labor was available on the east, and also a smaller part of the overall economy was represented by that Index. If that was the case, of course I can´t assure it is, then Germany might be much cheaper than stated. Please, correct me if I am complete off the mark. :)

Very usefull and informative. For calculating market Cap of Indian Stocks it will be better if you use national Stock Exchange (NSE) instead of BSE as most of the Business in India is done on NSE.
Kamal nayan

Spot on mate, I did a 25 year analysis and got a very different "normal". I would say though that the "normal" seems to be trending up, and if you account for this then perhaps Australia will get these returns. I'd prefer to be wary though (particularly as 6-7% GDP growth is very unlikely to continue). It's awesome food for though though, sure beats most other market valuation calls I've seen before...

1. In the Total Market Valuation/GDP, would you also post the average ratio value?

e.g. so rather than just seeing the min to max range over the number of years recorded, I think it may be useful to see the current v the mean ratio, so that users can see the current level of over/under valuation of all markets versus their historic norms on a total market valuation/gdp basis.

I have a similar question as Avenoak. The data that I get from WFE is slightly different than the data listed here. For example, Japan's Total Domestic Market cap on WFE is listed as 438 trillion yen as of October 2013. Here it is a 536 trillion yen at about the same period if I am reading the interactive chart correctly. Why are these numbers different?

According the WFE, world federation of exchanges, the TMC for Singapore in November 2013 is 965B in Singapore dollars which would lead to a TMC over GDP of 275%. Are you excluding foreign listings to explain this difference? If not what are you excluding?

So I ran a regression model on the variables on this page to see if there was some statistical evidence for the idea. I used the SP500 1940 - 2006 as a quick and dirty study. The dependent variable was 8 year implied return since the claim is that a market cycle is about 8 years. So I wanted to see if these variables (GDP growth, Dividend yield and mcap/gdp) could predict returns over a market cycle. The results were trivial. The variables above explain about 3% of the variance in 8 year returns (but at statistically insignificant levels). So, the variables explain very little about returns, but the results were not representative of the sample. So... it's not exactly proof that this strategy is a loser, but it's not encouraging. Perhaps the projected return has to be over multiple cycles. Perhaps the data is too short (and too narrow) to call it robust. But again, not encouraging. If any others do some analysis on this let me know.

The percentage of the market that is incorporated and securitized is obviously important for this type of analysis, but it might be much simpler (considering the private companies won't have tradable equity values, and thus one would have to find their earnings/revenues and slap an arbitrary multiple to it, not to mention private companies are those not seeking growth capital so they aren't truly comparable) to do CAPEs for all of the foreign countries as well?

I share the concern of Weltzinbrau mostly because I am amazed that Germany's max market/gdp ratio was 56%. If western countries are this varied, I'm not sure how reliable of a measure of relative value this is. I know Mebane Faber as well as a few banks have done some work on CAPE ratios for country indices, but I imagine it is intensive data-gathering work.

I've just discovered gurufocus and really like the way the information is presented -- great! I do have a question about these global growth predictions; it seems like it would be possible to go a step further and account for factors like % of GDP produced by the private sector, % of private sector that is listed, and GDP growth estimates.

In other words, assuming that the market cap to GDP ratio will revert a historical mean is also assuming that the GDP will grow at roughly the same pace, the public/private sector relationship will stay the same, and the % of companies listed (eligible for market cap) will stay the same. For the US this is probably pretty valid. For other regions, potentially not.

The info is posted is still really useful -- this added detail could just potentially be used to produce a better / more meaningful forecast.

Whoops, the defect is not just in Australian data - I see the same gaps in Chinese and Indian data. Maybe some others too. Can you please tidy this up? Ma Feel free to remove my remarks when its done. Thanks.

Nwoodman,
Fully agree with you. Resources boom fading out, growth likely to be stagnant with valuations for non defensive stocks to be depressed for the medium term as investors get off the juice. Damn that was some good shit though.

That Australia's future growth rate will be 7% is a ballsy forecast to say the least. Past performance on the back of a once in 140 years terms of trade boom, thanks to China, is definitely no indicator of future growth prospects. If anything it will likely have the mother of all reversions to the mean.

However, Ireally appreciate the metrics you guys have put together. The base info such as Market Cap/GDP is really useful

I was wondering something about the Expected Returns... and shouldn't they be calculated on more of an absolute basis rather than a relative basis? A lot of the average Market/GDP ratios are heavily skewed to the upside...

Example: At the peak, Japan had a Cyclically Adjusted PE ratio of around 100... that isn't economically sustainable. This would be like if one country had set its interest rates at 50% and another at 2%.

Suggestion: I think there should be a setting that allows you to change which metric you use to compare the valuations of different countries

1. The original, average Market/GDP of specific country vs. current and projected 10 year regression to mean.

2. Current Market/GDP vs average market/GDP of ALL countries. One has to make the judgement call from this point whether Russia deserves to be on the low end, but if we were to see a well developed democracy on the value end of this metric, it would be an interesting opportunity.

This seems to me to be highly advisable due to the fact that the data sets for these countries are so short term.

I like your approach to use "intrinsic value" calculation for foreign stockmarkets, but IMHO, there is a flaw: they are exaggerated by inflation in developing countries. Better use Real GDP growth. Otherwise the stockmarkets of countries with high inflation look more attractive than for countries with low controlled inflation. E.q. Zimbabwe would be a clear winner in your calculations. :)

I am confused for Australia you have an annualised economic growth rate for GDP of 7.05%. Looking at the past 10 years however there has only been one year which has been above 5%. Looking at the below link it looks like it has spent most of it's time around 3% GDP Growth p.a.. The forecasts by the RBA are only between 2-3%. Are these number accurate?

I'm not going to say exactly how yet, but soon hopefully you will see how I will personally contribute to significant change in market valuation for Russia. Gurufocus is the greatest investment resource in the world, thank you for teaching us what to do...

I spend quite a while reading about the method of valuation you use. Forgive me for being slow, but I still don't understand how the annual GDP growth for Russia has been 0%. The second part that I don't understand is 8 years economic cycle time period. How do we no where are we in the cycle ? It may take 2 years to return to the mean or in two years we may see new high which will skew all the data and will prompt for recalculation. If we leave the formula and methodology alone and just look at some other truths its pretty clear where the growth is going to be. This methodology projects 2% growth for Russia. With current market cap/GDP ratio of 46% vs US 98%, with most companies in Russia currently trading at half or even 1/3 of book value the choice where to put the money is pretty intuitive. Using historical data may be right for US but its definetely wrong for Russia and I will explain why. There are many reasons why the money is not flowing to Russian stock market which have little to do with fundamentals. It has to do with negative image of the country, political risks, low ratings, lack of transperancy, problems in corporate goverance, problems with focusing on investors for may executives, lack of research in eglish for Russian stocks and lack of visibility of financials and analysis in the world electronic systems. All this is changing, Russia is going to be the biggest economy in Europe by 2020. Mark this day on your calendar, Russia is not going to show average 2% return. It will show some of the highest numbers.

Your data about Russia makes no sense. In the graph you show growth in GDP year over year, but then you say:

Russia Historical GDP Growth
Historical GDP of Russia in billions of national currency. The GDP has grown at the annual rate of 0% over the past 8 years. Current Annual GDP: $1,676 billion US dollars or 53,535 in billions of national currency

How could this be ? Official data showed 4.5% GDP growth in 2011.
Same about expected return, your data is totally wrong based on the numbers that you are using. Russia has the most undervalued stocks out of all developed countries. Best companies in Russia like AFK Sistema which own the cream of the crop of Russian economy and is run by people close to Putin trades at half the equity. Do you think its going to last for long ? Also the trading volume of all russian brokers combined showed growth of 60% compared to last year, the total market cap of MICEX is going to increase in double digits on my humble opinion.

"This is from the contribution of economic growth: 0%, Dividend Yield: 1.93% and valuation reverse to the mean 0%. "

Is the economic growth i Russia expected to be 0% in the next 8 years according to the worldbank? The valutation today i 45 % and the mean is 83%, how could the contribution of the reverse to the mean be 0%?

This analysis needs to use median not mean. The relative immaturity of some of these markets + the TMT bubble's impact to developed Europe/UK mean these economies' forward return estimates are significantly overstated using means.

Is this data available for download to subscribers? What is the source data (particularly for total market cap)?

Gurufocus, I have downloaded the annual market/GDP from World Bank. It was very helpful but the figures given are annual. Do you know where to find historical quarterly data? I imagine you've backtested the strategy using the annual figures correct? It would be useful to find quarterly historical figures for market cap/gdp to "rebalance" the selected pool of ETFs quarterly based on the changes in market cap/gdp ratio. Please let us know if you know where to find the quarterly figures.

Can you please explain how 10.14 is calculated from your equation?(Re/Rb)(1/T)-1=10.14? It seems to me that your valuation method attempts to identify what the mean of TMC/GDP equals. Then to ascribe an amount that will enable the current TMC/GDP to revert to it (ie reversion to the mean). Using two points in time (Re/Rb) will not identify a mean or a reversion to it. Therefore, it doesn't make sense that the equation being posted is explaining your valuation method? If I am wrong please explain how you calculated 10.14 from the above equation or elaborate further on the equation that is being used by your system. Thank you.

Dear Sir,
Sorry to bother you again. I am Chief Officer on Cruise Ship and I have not too much idea about investment. I invested lump sum impulsively March, April 2009 during the market panic sell off. American passenger gives me this advice.....to jump when is a blood on the streets.....and when the market is at the bottom...
Could you please give some realistic % of return for the next 27-30 years?
Thank you again and I wish you a safe and successful journey in the investment world.
Best regards,
Tony

Hallo Everybody and Guru Focus Team,
I have 34,000.00 $ invested Fidelity Greater China Fund http://www.fidelity.com.sg/our_funds/factsheet/index.html?funds=44009
and 46,000.00 $ in Fidelity Pacific Fund http://www.fidelity.com.sg/our_funds/factsheet/index.html?funds=44017
Total Pacific Region invested -80,000.00 $
I calculated average 15.42 % return as per your: Projected Annualized Market Return (%) China, Singapore, Australia, Japan, Korea, India, Indonesia.
Could please calculate approximately how much I will have after 27 years when I plan to retire.
Let say inflation 4.5% per year. I think net (real) return would be 10.9% per year or I am something wrong.
Thank you for your reply.

I find this piece interesting, but got a question here. Where do you get the GDP growth data? I can hardly see China growing at 16% and the U.S. growing at 4% (as of 2/13) using "past GDP growth rates of these countries". GDP for 4Q11 in the U.S. was reported 2.7%, and for the whole 2011 was 1.7%.

1. You should look at including Hong Kong & Taiwan as proxies to China, but with better corporate governance. Some of the best long terms fund managers in Asia e.g. Aberdeen use this approach.

2. It's also quite important to use factors like the PE/10 or Shiller PE, because different countries may have fairly different baselines fr stock-market to GDP. Germany would probably rank higher on that measure too.

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